ECON 401 Fall 2013 Homework Set #3

ECON 401
Fall 2013
Homework Set #3
This assignment is due at the beginning of class on Tuesday, November 5.
1. Suppose the market for Cheese Puff Snacks is represented by the following
demand and supply equations:
𝑄 𝐷 = 30 - P and 𝑄 𝑆 = 3P – 10
where Q measures the number of bags of Cheese Puffs and P measures price
per bag of Cheese Puffs.
a) Find the equilibrium price and quantity.
b) If the government imposes a $4.00 tax per bag of Cheese Puffs on sellers to
pay for classes about healthy snacking, then what is the price that buyers pay,
the price that sellers receive, and the quantity of bags sold.
c) How does the tax affect the value of consumer surplus and the value of
producer surplus?
d) What is the deadweight loss from the tax and the revenue generated from this
2. Briefly discuss the meaning and significance of the following terms.
a) Substitution effect
b) Income effect.
3. Refer to: Goolsbee, Levitt and Syverson – Chapter 5, Problem #9 (page 206)
Points: Q1 =5 points; Q2=2 points; Q3=3. TOTAL=10 points